The Active SPY!
This is not intuitive thinking but your passive SPY (S&P500 ETF) sitting in your pension fund is only passive and low risk in perception. What you call a zero fee (or near zero fees) portfolio is not only concentrated but it is as concentrated as the most active portfolios in the world.
We compared Berkshire Hathaway (BRK), Finsbury Growth & Income Trust (FGT), and S&P500. And not so surprisingly, the passive S&P 500, which tells the world how brilliant it is compared to the Active Managers, is as concentrated as the Active Managers it wants to bring down through SPIVA (S&P Indexes vs. Active) publications.
For us, S&P 500 is not a passive but an active portfolio because of its concentration. And when you expose yourself to concentration, you are exposing yourself to risk. All you need is one Facebook, one Netflix, one Amazon, and one Google to bring the house of cards down. Thankfully Apple saved both BRK and S&P500 from sinking. In the end, you the passive owner of the SPY (S&P500 ETF) should be happy, your portfolio is a lot like BRK without the fees. In some ways, you can think of SPY as a BRK replication SPDR strategy.
The image below took 30%, 20%, and 10% of the total number of components in the three portfolios and plotted them against the respective total values of the respective portfolios. S&P500 has 500 stocks, BRK has 50 components and FGT has 22 holdings. SPY stood firm along with its active peers with high concentration and weight. The top 50 stocks of the SPY held 50% of the total value. While the top 150 stocks (out of 500) of the SPY held almost 80% of the total value. These weights were very similar to the skewed weights in BRK. When 50 stocks out of 500 own 50% of the total weight, what diversification are we speaking about?
Don’t let the more than 100-year-old benchmarking method fool you. The passive low turnover is another illusion because the weight of a component changes with every price change. The obsession with weighting a component with every change of tick is worse than rebalancing the portfolio yearly. But more about that later. We will let you enjoy being an active manager for now, along with the world's best.
